The Option Investor Newsletter Thursday 5-4-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 5-04-2000 High Low Volume Advance Decline DOW 10413.10 - 67.00 10523.10 10407.50 919,329k 1,614 1,278 Nasdaq 3,720.24 + 12.93 3762.47 3679.43 1,287,334k 2,199 1,770 S&P-100 756.81 - 4.37 764.37 754.29 Totals 3,813 3,048 S&P-500 1409.38 - 5.72 1420.99 1404.94 55.6% 44.4% $RUT 501.91 + 6.35 502.63 495.52 $TRAN 2794.96 - 1.49 2806.93 2784.79 VIX 35.43 + 0.92 36.38 34.17 Put/Call Ratio .58 ****************************************************************** Fed fears raise risk reward ratios to unacceptable levels. Will he or won't he? Only Greenspan knows for sure and he is not talking. Actually he is talking but he is not saying anything and that worries investors. The fear of the Fed put the skids on the Dow again today as financial issues continue to look for shelter. There is no other news worth repeating. It is Fed, Fed, Fed interspersed with the love bug virus. Now if we could only send the Fed the virus.... The Dow actually did not have a bad day. Yes, it finished down -67 points but after yesterday's whopping loss the narrow trading range for today was like a breath of fresh air. 10400 appeared to hold today and could be a staging point for the next rebound if the non-farm payrolls are benign. The Nasdaq only posted a +13 point gain but after being down -192 at the low yesterday we will take anything we can get. Actually with the bottom at 3600 yesterday and roughly 3700 today we still have a strong series of higher lows building upward pressure as more and more long term investors decide that the worst is over. The Love Bug Virus was about the only thing besides the Fed in the news today. This serious virus has reportedly infected hundreds of thousands of computers and it goes after the heart of Windows, the registry. The FBI has already started working on tracking down the authors of the virus. Some reports have it starting in the Philippines. The main thing you should learn from this is NEVER OPEN ANY ATTACHMENT FROM ANYBODY unless you confirm with them that it is ok. Most of the recent virus attacks have cloned themselves to your email system and send emails to your address list without your knowledge. That love letter you got today was sent from your friends computer but not by your friend. If you are sending an attached file to someone it is a good idea to include some text that says, "Bill, this attachment is okay to open, Fred." If you send files repeatedly to others you can setup a code word to tell them quickly that it is a real file. Something like "Matrix" in the subject line tells them that the attachment really came from you. You can tell how many people thought they were really in love by the number of virus emails you received today. The people whose lists I belong to must be very amorous because I received almost a dozen virus emails. Makes you wonder since all of the ones I got came from guys and most are married. Does this prove how gullible males really are? Enough talk of the Love Bug virus when we have a real interest rate virus taking a toll on the markets. You have heard it all week but the toll on the markets is growing. The Fed dread is paralyzing investors into non-action. The volume in the market is drying up as buyers sit on the sidelines and wait. Today's economic report showed that worker productivity dropped to only half of the huge gains from last month. With productivity up only +2.4% the Fed loses one of the reasons to be incremental in their rate hikes. Productivity had been soaring and the Fed kept scratching their collective heads because higher wages was ok with higher productivity. Drop productivity and all of a sudden higher wages are more critical to the interest rate decision. Greenspan is really in a quandary this month. The market is choosing up sides and even if he wanted to only raise +.25% the market analysts are forcing his hand. The Fed fund futures, which have been right 30 of the last 31 times are calling for a 66% chance of a +.50% hike. Not a sure thing but close. Volume on the futures has increased +40% since the ECI last week as investors hedge their investments against a runaway Fed. The futures show a 100% chance of a +25% rate hike at each of the next three meetings and reach the 7% level. If that is not enough there is also almost a 75% chance according to the futures that the Fed funds rate will be 7.5% next year. Yes, 7.5%. Anything in the 7% range is going to put serious pressure on the stock market. So what happened to mister incremental? Greenspan has always been known as slow and steady. Using his analogy of the US economy as a super tanker and interest rate hikes as very small chances in rudder direction, even the smallest changes in the rudder will eventually change the course of the tanker but it could be miles before they are noticed. Interest rate changes take 6-9 months to be felt in the economy and the main fear is the last hike. The one that hikes too far and forces the Fed to react in the opposite direction with cuts. The Fed does not want to be constantly changing rates. They would rather just keep the speed constant and not ever be responsible for a recession. Greenspan spoke today and he said nothing about rate hikes. OOPS! The Fed always clearly indicates policy in advance of action. Did his no comment mean he was still undecided about how big an increase they might make? Or was his no comment a crafty way to give the market another Maalox moment as analysts scrambled to read into his comments something that was not there? Are we having fun yet? This soap opera is getting more complicated with each newscast. Greenspan cannot simply rely on the self correcting, self discounting US markets when making this decision. The wild card this week is the Euro. Yes, the Euro, now trading at an all time low and dropping daily as the US dollar gets stronger. Higher interest rates create a stronger US dollar and that impacts the other world currencies. If the Fed wanted to raise +.50% to shock the economy they now have to also worry about the falling Euro. This now adds an element of global responsibility to the decision as well. We have had hike after hike over the last few months and the market just shook it off and continued to roar. Why is this meeting causing so much concern? The answer is valuations and inflation. Inflation as reported in the CPI/PPI/ECI etc is slowly showing undeniable signs of growth. Between now and the May-16th FOMC meeting there is no lack of economic reports. The Non-farm payroll report on Friday could be the spark that starts the bonfire. With new jobs expected to be over +310,000 analysts worry that the unemployment rate could drop below the psychologically important 4% level. Hourly wages could increase by more than .4% and wage growth by more than 3.9% annually. It is a recipe for inflation disaster. Add the PPI report on the 12th and the CPI report on Tuesday of the Fed meeting and the Fed has every piece of information they need to make their move. The worry of course is that these three reports will all line up to confirm the inflation rumor and cause the Fed to react aggressively for the next several meetings and that would be a very bad sign. Robert Perry, the San Francisco Fed President, said today that the Fed needs to act aggressively, but cautiously. Nothing like talking out of both sides of your mouth. This type of rhetoric is causing confusion in the market and when there is confusion money moves to the sidelines. Higher interest rates impact high PE stocks and many old time investors point to the S&P-500 with an average PE of 24.7 as historically over valued. The bulls however point to popular stocks like EBAY with a PE of 1,369 and claim the S&P is undervalued. It is like the chocolate or vanilla question. The answer is not material as long as you are happy with the one you order. This market has slowed on the historical impact of interest rates but in reality I think interest rates are not as applicable to Nasdaq stocks as they once were. Barton Biggs of course reserves the right to be wrong forever on market direction. The noted bear actually said today that he could see a relief rally of two to three weeks after the Fed decision but stocks would come back down. So if he has been wrong for years and he is calling for a relief rally, does that mean the market will crash? Fed worries have put a lid on volume with the NYSE only trading slightly over 900 mln shares and the Nasdaq only 1.2 bln. Simply a buyers strike of major proportions. The NYSE advance declines was actually positive as were the Nasdaq advances as well. This tells me there are no sellers either. It looks to me like we could be setting up for a relief rally. I hate to agree with Barton but there are signs in the charts. The Nasdaq has four higher lows and held firm today when it could have easily sold off in fear. I believe that if the non-farm payrolls comes in at anything less than complete blowout then the Nasdaq will rebound to the 4000 level again. Hopefully putting in another higher low before the Fed meeting. We have a week before the PPI and a week in this market is an eternity. I think the market has already priced in a +.50% hike and only a +.25% hike will be viewed almost like an easing. The Fed has not raised more than .25% in five years and with the Euro lurking in the background the rate hike is still a toss up in my mind. I am more concerned about the weak fund inflows this week than the Fed. Of course the weak cash flows could be simply Fed dread at The retail level. The VIX is screaming buy at 36 but before you dip in to that margin money again remember it was over 40 on the big dip last month and that is the highest it has been since Oct-1998. My parting thought, greed is alive and well. With the market beaten down so hard over the last month the odds of a strong rally after the Fed meeting and into the July earnings period are very strong. When odds are in favor of a rally aggressive investors will start moving into position in advance of the event. This is setting us up for buying on a benign jobs report and support building next week for a post Fed rally. Should you buy yet? Let your conscience be your guide. I am still flat with only one small position. I almost succumbed to the buying impulse today at the close but decided to be safe not sorry. I wish the jobs report would come in at 600,000 jobs and give us one more tweezer bottom at the open. Instead since I am flat we will probably get a less than expected number and the market will gap open +200 points and never look back. Murphy is alive and well! I will be target shooting at the open on any negative news because I believe the downside is limited. It is my personal opinion but I do vote with my own money. Trade smart and don't buy too soon. Jim Brown Editor Current long positions include: RAMP ****************************Advertisement************************* Options Traders ! Mr. Stock's new online trading site has been designed for you. Trade spreads, straddles, covered writes, and stocks online. Get real-time market data throughout our site. Advanced options tools include volatility graphs, implied volatilities, and more. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ****************************************************************** ********** STOCK NEWS ********** Eastman Chemical To Buy McWorter Technologies By Matt Paolucci Eastman Chemical Co. (EMN) will buy specialty resin maker McWhorter Technologies Inc. (MWT) for about $200 million cash. Eastman will also assume about $155 million of McWhorter debt. Under the agreement, a wholly owned subsidiary of Kingsport, Tenn.-based Eastman will commence a tender offer for all outstanding common shares of Carpentersville, Ill.-based McWhorter at $19.70 cash per share. Allan Rothwell, president of the Chemicals Group at Eastman, said his firm had identified a number of synergies that "give us confidence that this acquisition will meet our financial and business goals." He said current projections and assumptions show the acquisition will be immediately accretive to cash flow and should turn accretive to earnings in 2001. The deal, which will be accounted for as a purchase, is expected to increase Eastman's presence in the coatings, adhesives and specialty polymers product lines to approximately US$1.4 billion in annual revenues. "This transaction represents another significant step in Eastman's strategy of pursuing growth opportunities for our specialty businesses, which offer faster growth and payback on investments, provide lower cyclicality and capital intensity and allow us to capitalize on our strengths," said Earnest W. Deavenport, Jr., chairman and CEO. The deal, approved by both companies' boards, is expected to boost Eastman's presence in the coatings, adhesives and specialty polymers market to about $1.4 billion in annual revenues. Eastman, which makes and markets plastics, chemicals and fibers, had 1999 sales of $4.6 billion. McWhorter is a leading manufacturer of specialty resins and colorants used in the production of consumer and industrial coatings and reinforced fiberglass plastics. Sales for fiscal 1999 were $444 million. Following completion of the tender offer, Eastman plans to consummate a cash merger to acquire any shares not previously tendered. McWhorter has some 10 million shares outstanding. Allan Rothwell, president of the Chemicals Group at Eastman, said that he and his team are eager to complete the transaction and begin integrating the McWhorter and Eastman businesses. "Our current projections and assumptions show this acquisition will be accretive on a cash basis immediately and should turn accretive on an earnings basis during 2001." He noted that previous transactions, including the acquisition of Lawter International in June of 1999, enhance the synergies of the McWhorter acquisition. Jeff Nodland, McWhorter CEO, also expressed support for the merger. "McWhorter and Eastman have had a similar focus on selling products to the coatings industry. We expect that our customers will benefit from this combination as we enhance the capabilities of both organizations to develop better products and services for the industry," he said. ************** MARKET POSTURE ************** As of Market Close - Thursday, May 4, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 11,000 11,400 10,413 BEARISH 4.28 SPX S&P 500 1,500 1,550 1,409 BEARISH 4.14 OEX S&P 100 800 850 757 BEARISH 4.13 RUT Russell 2000 550 600 502 BEARISH 4.14 NDX NASD 100 4,000 4,500 3,571 BEARISH 4.13 MSH High Tech 1,000 1,150 922 BEARISH 4.13 XCI Hardware 1,600 1,700 1,444 BEARISH 4.13 CWX Software 1,500 1,670 1,186 BEARISH 4.04 SOX Semiconductor 1,200 1,300 1,088 BEARISH 4.13 NWX Networking 1,070 1,190 1,011 BEARISH 4.04 INX Internet 800 940 601 BEARISH 4.04 BIX Banking 530 620 528 BEARISH 5.04 * XBD Brokerage 500 580 455 BEARISH 4.14 IUX Insurance 540 620 583 Neutral 3.16 RLX Retail 900 1,000 859 BEARISH 5.04 * DRG Drug 355 385 371 Neutral 4.28 HCX Healthcare 710 775 755 Neutral 4.28 XAL Airline 130 155 145 Neutral 3.10 OIX Oil & Gas 265 300 289 Neutral 3.16 Posture Alert Broad market indices under continued as the DJIA slips under the key 10,500 level again. Today, the Banking and Retail industry sectors closes below their 50dma and key benchmark support level. We have, therefore, turned Bearish across these sectors. **************** MARKET SENTIMENT **************** Thursday, May 4, 2000 Treading Water Broad markets caught treading water as investors sit on the sidelines ahead of tomorrow's key unemployment report. Before we take a look at some of the sentiment related indicators, Pinnacle Capital Advisors would like to touch on one subject that keeps popping up in the business news media. Are we in a Bear market? For those who attended the Options Expo in Denver at the end of March, we talked about the four key market and/or stock stages as outlined below: Stage 1 - Bottom Consolidation Stage 2 - Breakout Stage 3 - Top Consolidation Stage 4 - Breakdown One of the characteristics of a breakdown bear market or Stage 4 is that the market or industry sector index breaks below its DECLINING 200 dma. Pop quiz? Which industry sectors that we cover in our market posture section have drifted into the classic breakdown bear market phase (Stage 4)? Most would be surprised to learn that really only one index clearly falls into the classic breakdown bear market phase (stage 4) - Banking (BIX). Although two other indices are currently trading under its 200dma (Retail and Oil & Gas), their respective 200dma are flat rather than declining. Although we have experienced some steep declines in the technology sector and we may turn bearish over the near term, we remain firmly ABOVE the INCLINING 200dma. This tells Pinnacle that, at best, we may be ending the breakout stage (Stage 2) and entering into the top consolidation phase (stage 3). But it's too soon to tell yet until we test the prior highs again. So be careful as you listen to CNBC and falsely assume we are going to skip the top consolidation phase (Stage 3, and move directly to the breakdown phase (Stage 4). We will be addressing this topic more in Sunday's (5/7) newsletter so stay tune. Now let's turn our attention to market sentiment. The first observation is that the market volatility index (VIX) closed at 35.20 and appears that wants to spike near its previous high and give us another BUY signal perhaps as early as tomorrow morning when the key unemployment figures are released. However, the other reports we like to look at to confirm an intermediate bottom is the QQQ and SPY volume. For a classic bottom, we like to see these instruments show high volume during bottom reversals and we have not really seen this yet. Finally, don't look now, but the 30-year Treasury bond Index has moved higher and closed above the key 6% level again. Higher interest rates generally are not good for the equity markets. BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. General Electric is the latest bellwether to give positive comments regarding earnings. Volatility Index (35.43): The VIX continues to prove that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. Short Interest (NYSE): Short interest on the NYSE fell 1.33% to 4,055,931,190 shares on April 14; however, this is still a high level and from a contrarian viewpoint, would be considered bullish. Mixed Signs: BEARISH Signs: Interest Rates (6.174): Don't look now, but the 30-year Treasury bond Index has moved higher and closed above the key 6% level again. Higher interest rates generally are not good for the equity markets. Crunch: With the fear of inflation, and the most likely scenario of several more rate hikes, liquidity in the marketplace will become a more significant issue and put more pressure on equities. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. Investor Expectations: More and more investors are now expecting high double-digit growth if not triple-digit expansion in their portfolios. This extreme positive sentiment could help fuel a future sell-off in technology shares. ***************************************************************** The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index ***************************************************************** OEX Friday Tues Thurs Benchmark (4/28) (5/2) (5/4) ***************************************************************** Overhead Resistance (805-830) 3.03 3.43 3.53 Overhead Resistance (775-800) 1.04 1.05 1.05 OEX Close 781.42 779.25 757.20 Underlying Support (745-770) 2.22 2.49 2.56 Underlying Support (715-740) 8.19 4.95 5.20 What the Pinnacle Index is telling us: Based on the above statistics, direct overhead and direct underlying both remain light, indicating we could either way with relative ease. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (4/28) (5/2) (5/4) ***************************************************************** CBOE Total P/C Ratio .51 .58 .58 CBOE Equity P/C Ratio .41 .49 .49 OEX P/C Ratio 1.29 1.98 1.98 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (4/28) (5/2) (5/4) ***************************************************************** Puts 660 / 5,521 710 / 5,506 700 / 5,711 Calls 800 / 5,916 800 / 5,440 800 / 7,995 Put/Call Ratio 0.93 1.01 .71 Market Volatility Index (VIX) ***************************************************************** Major Date Turning Point VIX ***************************************************************** October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom 32.12 October 15, 1999 Bottom 32.06 January 28, 2000 Bottom 29.09 April 14, 2000 Bottom? 39.33 May 2, 2000 30.86 May 4, 2000 35.43 ************ WOMANS WORLD ************ What Trading Style Will You Use In A Sideways Market? By Renee White Did you hear the comments today? "We could already be in a bear market and not even know it." Is your trading style conducive to making money in this environment? Most are not. Many of you are trying to fight the trend, like the email I received last night attached to the end of this article. Others are sitting out, avoiding more mistakes. Then there are a few, who are lucky enough to scalp small consistent profits. Fewer still, are skilled enough to know with confidence, they can profit in this environment. Since I changed my trading style, I find myself in the lucky scalping category. If this stops working, I will move to the sidelines and continue to study my books. As option traders, we all know that our movements are exponential due to the leverage afforded the derivative. That has made many option traders very wealthy, in the era of a strong underlying bull market. Unfortunately, most of these traders are new and have no experience trading bear markets where the exponential move to the downside, could make many option traders cry. New traders think a bear market lasts a day or two, or a couple of weeks. To some, it is just another dip to be bought perhaps with 3-6 month options, riding out the storm with the optimism of a child before Christmas. Funny how dreams of great wealth make so many blind to objectivity. Tenured option traders know that they must play the market given to them. Dues are high into this club as many are unable to read the necessity to change perspectives on the head of a fiber-optic thread. Many dismiss the warning signs. At this point, there are many who expect our problems (problems being an unappreciative market for bull option traders), to be over once the May FOMC meeting is over. Perhaps they are right. There are thoughts that a 50 basis point interest rate increase could actually cause a relief rally in this ischemic market. I'd like to challenge you to consider what might happen to your trading account, if we only get that 25 basis point increase instead. I suspect it would cause continued weakness and a bad June trading month as we continue low volume waiting on the June FOMC meeting. Of course by then, more economic data will be available for fearful scrutiny every week. To be a successful option trader, you must learn to read the market. We say all the time, learning the strategy alone is not enough. One must learn when to play which strategy, when to let them run and when to take a large loss before it becomes the larger one. I wrote in March about what a bad joke it would be if we did not get an April's earning run and the split plays didn't work. Gosh, I wish I had read my own words! Was that by accident? I don't know. I just write what comes to mind on the day of an article; a free flowing assessment of my thought process as it relates to my own trading. When markets are healthy, it is easy to talk about plays. But a prolonged bear market or worse, a prolonged sideways market, is not something most option traders have experienced. All levels of option traders are adjusting their trading styles these days. The noise on the street is bothering me. I'm not as confident about blowing off bearish comments as I've been in the past. That is new for me. I've learned before; when I lose significant money in the markets, my trading improves. Expensive lessons! My mother, a child of the depression, asked me several years ago what happens to my trading if the markets go down. I told her I would have to learn to play the downside. Until this recent decline, I never felt comfortable playing down markets because it seemed against the overall up-trend. What scares me now is that I am practicing these skills. I'm not comfortable placing bullish option trades 6 months out and frankly, I am not comfortable holding much at all overnight. I'm not even ready to buy leaps yet. Each of us will need to assess our own risk tolerance and determine our own strengths and weaknesses. Those who sit out until they feel a clear market direction may be the wisest and wealthiest of all. A trend-less market (one that is range-bound), is the toughest market for 90% of option traders to be successful in. Many try one new unsuccessful strategy after another, trying to find the one that works, instead of realizing that what worked in the morning, might not work in the afternoon. A range-bound market is much more difficult to trade than either a bull or bear market. Instead, it makes a great time to read, study and pay attention to those personal areas of your life that you have neglected. That's hard too, if you are living on the income from trading. The reason for this rhetoric is my fear that we could stay range bound for many months, if not most of the year. Sure, the economy is good, but the markets have a mind of their own and tend to trade ahead of what we see as general consumers. Each of us needs to be challenged to think ahead of the curve and determine how this possibility will affect our own trading styles. Will you be one of those who completely ignores the signs that the game has changed? Will you be one of those looking back at the end of the year, asking yourself why you did what you did? Do you have a defined strategy to make money that is specifically set aside for range-bound market? Can you act fast enough to take advantage of a surging rally that lasted only half a day, then grab profits quickly before it sells-off again the very next morning? If you must play, learning new techniques that work in this environment, will improve your life-long trading skills. Is it time to learn hedging techniques, calendar spreads or more sophisticated strategies? Or is day-trading more comfortable knowing exactly what you gained or lost at the end of each day? Will you still be successful picking the right equity to play? Or is this the time to learn to trade the broader market or indexes? Each of us may be different in our assessments but the important thing is to ask yourself if you are playing the market that is given. I am pondering these thoughts myself, daily. Let's all hope I am wrong and the stagnation ends soon. On the brighter side, the first FOMC meeting in which we do not get a rate hike will probably make all of us money as the market rallies and the shorts are squeezed to cover. However, would that be enough to advance through the typical summer doldrums when volume is historically low and markets historically weak? Gosh, I wish I new. Also, be careful shorting or playing the downside if all the generals are sitting at support. That would be another mean trick to be playing the downside successfully, only to be caught in a market reversal when everything is sitting at the bottom of the trading range. This email from yesterday, prompted today's article. "Dear Renee: I am one of those NEW OPTION TRADERS you mentioned in your article today. I "thought" I picked good option plays and was making money (until yesterday) but because the Canadian online trading does not allow Stop Loss Orders to preserve profits, it all went down the tubes." (a list of their current May options was listed for my review) "Is there really hope for a (GE) rally for the 3:1 split on Friday with bad news looming on Thursday? There's 3 red arrows already! If the intrinsic value goes to 0 and there is a lot of time left to the 20th of May, then if the option starts rallying again, I would still have a chance to recover some monies. Worst-case scenario would be that it expires worthless. Does this mean I do not have to pay broker's fee to sell, right?" T Oh Dear T, the glassy-eyed innocence of a new "trader". I don't know where to start. I think I could write a book in response to your email. I cannot give you specific investment advice but I will tell you that I hold NO May, June or short-term option plays. Others may choose to play May options as it fits with their risk profile, but mine is saying stay out. May options are losing time value at a rapid pace right now because we do NOT have plenty of time with only 2 weeks left. The last 30 days is the fastest deterioration of time value on your premiums, escalating daily. It sounds to me by focusing on option expiration day and splits, that you are not looking at the bigger picture. We have some major economic events going on right now, which affect your plays. Please explain to yourself, why you would hold an option that is losing value, waiting on it to expire worthless and worrying about the commission on an option going to 0? Why not sell it before it is worthless and lose a little of your investment, instead of all of it? You are missing a clear understanding of some major parts to the game, needed to be successful. I would suggest using this time to read and paper trade. See if you can be successful with that first. You will be glad you did. Good luck with your continued studies. R. Again, This Is Not A Market Beginners Should Be Trying To Learn In. Even a relief rally on Friday will not change that feeling. These days, I am spending time re-evaluating my own trading style, with little tolerance for anything that goes against me. I am trying my best to look at where the market is right now, not where it has been, or where I hope and wish it will go. Contact Support ***** Reverse Conversions By Mary Redmond Last week I wrote about the conversion ratio and why it is significant to option traders. There is also a reverse conversion, which is usually used by floor traders to offset a position. Part of our job as options traders is to understand the reasons options are priced the way they are. This can sometimes help to identify mispriced options. A conversion is important because it helps traders to understand the put/call ratio and why options are priced according to this ratio. Puts and calls are priced so that the conversion profit is equal to or less than the rate of borrowing money for the time period of the option. If this were not true, then traders would use conversions all the time since it is a theoretical risk free profit. A conversion means buying a stock and a put, and writing a call with the same strike price and expiration date. A reverse conversion means selling the stock short, selling a put and buying a call. For example, when CMGI was 62.5 the June 62.5 call was 7 7/8 to 8 5/8, and the June 65 put was 7 3/8 to 8. If you were to buy the put at 8, the market maker might sell the put to you at 8, short the stock at 62.5 and buy the call at 7 7/8. His profit in this case would be 1/8 of a point, since they do not pay transaction fees. The market maker is protected from loss in this case because if the stock goes up he can exersize his call and buy it at 62.5 to cover the short. If it goes down, the call expires, and if he is "put," meaning he has to buy, then he buys and sells to cover. Market makers usually do not go naked on options positions. This week has been a frustrating week for most option traders since the best thing for most beginners to do has been nothing. Covered call writing can sometimes be profitable in a sideways market, but the call premiums on most stocks have been so low that they are hardly worth writing. Since many tech stocks have been flat or in a down trend in the last few weeks some put premiums are higher than the call premiums. You might make more money by selling puts than buy writing covered calls. However, selling naked puts has the risk that you will end up owning the stock and incurring a substantial loss if the stock drops significantly. It is usually not a wise strategy to use in a downward trending market. There are some ways to protect yourself if you want to sell a put. The most common is probably a bullish put credit spread. This means that you are selling a put and buying another put which is less expensive. I bought some two year leaps on my favorite stocks this week. I lost a couple of points on some of them but I think they could triple over the next six months. I was thinking of Dow and Nasdaq straddles, but the indexes have not been flat long enough for both premiums to be profitable. AMG Data reported that equity funds actually showed net redemptions of 555 million for the week ending May 3, 2000. Large cap growth funds showed inflows of 1.2 billion, small cap growth funds showed outflows of 690 million. Technology funds did report inflows, but large cap equity index funds showed outflows of approximately 264 million. This would be a disturbing trend if it continued for a long period of time, however it may be indicative of investors' hesitation to jump back into the market before the Fed meeting. While April did have a week of net outflows from funds, the month showed positive inflows. Contact Support ************** TRADERS CORNER ************** SKYBOX: An OEX Trader's Tool By Austin Passamonte Have you seen the new Skybox format? Is that a big improvement or what! The team at Pinnacle along with OptionInvestor have continued to provide cutting-edge tools for the trade. Now what excuse will I have to give Wendy for my underperformances? An e-mail inbox full of messages tells me more than a few traders still have questions to the mechanics of how Skybox operates. Again, I'm just an independent trader giving my interpretation of this methodology; I expect you might begin to see further instructions within the Skybox link soon. That being said, let's try to clear up some cobwebs in a concise manner. The Skybox lists three different benchmarks for each new trading day ahead. The objective is to purchase the recommended call and put options listed for the suggested price or less when the OEX index trades into or through that benchmark level. It does not matter if the market is going up or down - if the key bullish or bearish benchmark is hit AND the listed option can be had for the given price, we're in. Focus on that. If the market itself is rising and trades into a bearish trigger, we buy put options if their price level can be met. By the same token when the market is falling and it hits a bullish trigger we buy call options if the price limit can be met. The premise is that these benchmarks are potential points of resistance or at least market exhaustion, and a reversal is likely. The only time trades are ignored is when the OEX gaps past a benchmark without trading through the levels. In other words if the market closes at 761 and gaps down to 755 at the open, we stand aside unless the index trades back into the 758 level and our option price can be met. When observing the action here you will notice many times, maybe even a majority the index hits a trigger point and the option price bid/ask is above suggested purchase. This means volatility lies in favor of the sellers. On large-range days for the OEX it's common for either calls or puts to be skewed in volatility, meaning the target price for one side of the trade may be available but not on the other. On Wednesday this week as the OEX fell from 778 to 751, the option chain my broker offers showed put options at the benchmark were valued in the low 30's while calls at the same point were listed in the high 30's for implied volatility. I'm no expert on vega or the greeks, I only know that which I observe real-time. This may explain why certain plays can be executed or not during volatile trading days. If the market trades through both the bullish and bearish signals at a given benchmark and each options' price is met, the trader buys both and holds a "long strangle". With stop loss orders in place we hope the index will decide to take off in either direction, stopping out the losing leg while the other runs deep into the money. Should the market decide to chop around the benchmark, we must bite the bullet and attempt to repurchase any stopped positions the index trades through again each time purchase conditions permit. Eventually the darned OEX will make up its mind and run off in either direction hopefully with us aboard! That is the very best I can do to explain the basic outline; further questions will be answered in future articles, the Skybox site and most importantly of all, self-study of the index and system on your part over time. When I sat in on Austin Tanner's sessions covering the Skybox in Denver this spring, he stated (I'm paraphrasing) that the Skybox is a good method for trading in itself, but perhaps the best use for it is a training tool. I couldn't agree more. I mentioned before that trading the system verbatim isn't easy for a number of reasons, and it's certainly not for everyone. On the other hand, any person who trades the OEX can use the Skybox as a crucial tool in their repertoire. Objective-style traders can learn the nuances, set up to trade the model exactly and should make money. Experienced traders who prefer a more subjective style and beginners just getting started can use it as a guideline to trade some high-percentage winners with patience and preparation added to the mix. Commonly, a few days each week offer good opportunities for high-odds OEX trades that should break-even or win roughly 80% of the time and yield 2 - 5 points in profit. This is done based upon following the Skybox benchmark triggers with intent to take small, safe chunks from the middle of most solid moves. We need to be content here with a risk/reward ratio of 1/1 and that means we must profit 60% of the time to at least break even after commissions. More about that tomorrow. Here is the basis of our strategy; the OEX benchmarks listed in Skybox are suspected points of congestion that may offer support and/or resistance. One thing you'll notice when studying OEX charts of past movement or live action is the strong tendency it has to chop around each benchmark. They act like gravity, tugging the index each way until the grasp is finally broken and the market heads off into the sunset of profit. For heaven's sake don't just take my word for it! Look at any bar chart yourself and see if this is true. Do you notice what usually happens once the market breaks free of the congested area? It tends to make a solid, steady move to the next one! Let's put this behavior work for us, shall we? Say you are watching the OEX market looking for an entry point to capture the next move. The index is trading at 784 and heading lower. Skybox rules specify you buy 790 OEX calls if the price is met at the 782 level. If it moves through and trips our 758 mark, we need to buy puts. However, before you pull the trigger on any trade, perhaps you'd like to see the market commit directionally. Why don't we just let the market clear this congestion and try to hitch a ride from there? Options purchased at the Skybox trigger levels are priced for sale when the next benchmark is approached. In other words, if we buy a 770 put for 14.50 today and it moves in our favor, by the time the suggested sale price of 22.5 is met the Index will be trading around the 764 - 763 level. This is true with all of the listed options, they are initially priced to sell once they reach several points into the money. So, our OEX trading zone from purchase to sale in this case would be 778 to 764, give or take a bit. Most of the profit ratios are 40% 55% on the winning trades via Skybox. Would you be happy for just part of that if fewer losses are involved? A profitable tactic is to buy options in the direction the OEX is trading only AFTER clearing that direction's trigger level by at least 3 points. You will notice from studying charts and watching the OEX live that once it moves at least 3 points beyond a trigger it seldom reverses and charges back deep through the direction from which it came. I said seldom, not never! There are clearly times when the index reverses and leaves your trade in it's prop wash, so make setting those stops your first priority upon execution!!! Once your order is filled, set the stop 2 1/2 points below your purchase. Eight out of ten times the market will move in your favor. Once the bid price of your position has increased 1.5 points or more above your purchase, I strongly suggest moving your stop loss up from below your entry and place it where you bought the options to lock in a potential "free trade". What we try accomplishing here is just take the middle out of a solid move. Once congestion at the benchmark is broken, we want to enter the market WITH the established direction. Next order of importance is to protect the position in case we were wrong. Lastly, it's powerful to move up a trailing stop to at least exit the trade with most of our capital intact. The decision of when to take profits depends on your risk level after that. Alas, if only it were merely this simple! You must decide what price you're willing to pay for these options and that depends on how long you are willing to hold them. If the going price at the benchmark was equal to or less than what's listed in Skybox, you know it is still fair two or three index points away. When higher than "fair value", you could still take the trade understanding that it must be closed WELL BEFORE the trading day is over to capture those inflated premiums. Please don't sit on expensive options and watch the value peel away like this year's first sunburn. I've done that enough times for both of us, so your turn is already used up! When option prices are high, one should only buy when inside the Bid, and don't chase a market running away. Never buy at "ask" when the price spread is greater than ¾ of a point, or 1 full point at the very most. It will make your stop loss too vulnerable to market noise. How do you buy inside the spread successfully? Place your "limit-buy" order halfway between the bid/ask spread. Keep in mind that the less you pay is more you earn upon sale. There are plenty of excellent option tradingbooks for sale within this website that teach how, and every serious trader should have most of them in the home library. I'll do my best to explain how I split wide bid/ask spreads a bit later on, and you'll hear successes and heartaches of missed trades as well. Stick with trading options one strike away from the money with good liquidity and this is seldom a problem. Back to our example. The OEX is falling from 784 to 783 and into 782. We do nothing but watch. It bounces off 782 a few times, 780 a few times and surges down to 775. Are you convinced we might be headed further? Buy the 770 puts if you're comfortable with the price and lock in that stop loss. If the market continues falling, raise your stop loss to the purchase price and the "free trade" is on! Of course, if the market were to reverse and gap through the stop you might lose a bit of money, but it's almost free. Now decide where you want to exit. Are you content to take a quick 2-3 point profit and wait for the next move? If so, you should score a 70 - 80% success rate of profit or break-even. Prefer to ride out the entire move? Sell this position at or near the suggested profit mark given in the Skybox. Remember, we missed a few points of potential profit on the front end because we bought late but the Skybox target remains intact. Whatever you decide, keep those stops in place, Take profits when offered and for gosh sakes, sell any over-priced contracts ASAP! Perhaps you'll find this directional trading a bit more to your liking than Skybox regimen verbatim. Each method offers separate strengths and can certainly be profitable or costly depending on how we handle our part. Sunday we'll cover money management strategies for trading each of these methods with maximum results, which will prove themselves by you doing the calculations yourself. Looking forward to visiting with you then, and get those calculators ready! Trade the right direction. *********** OPTIONS 101 *********** It's Good To Be Back! By Lee Lowell The last six weeks have been very interesting to say the least. My wife was involved in an automobile accident at eight months pregnant (she and baby were fine). We moved residences two weeks after that, had to find a new car, gave birth to my second daughter, and had to fight this awful bear market with too many open positions. Talk about the levy breaking. It has probably been the hardest/worst month of my trading career. There are some circumstances that you just cannot prepare for and if you are in the trading business, this is why we preach strict money management rules. As I wrote in my last piece about the risks of trading, I wish I was more adamant about following those rules. As you never know what events will occur in your life, let's all set those stops and keep the profits. I want to talk about "synthetics" and "equivalent positions" as they apply to options trading. "Synthetics" is a term that describes different option strategies that have the same outcome. Did you know that a "covered call" and the sale of a "naked put" will yield the same position? They have the same risk/reward profile, yet your broker probably will only let you execute the covered call. Let's break it down. When you sell a covered call, your upside profit is limited once you hit your short call, and your downside loss is unlimited (to the point of the stock going to zero). When you sell a naked put, your upside profit is limited to the amount of premium you sold the put for, and your downside loss is unlimited (to the point of the stock going to zero). The absolute numbers will be different in the end, but the risk/reward is exactly the same - limited profit, unlimited loss. Sounds the same to me. So what's the difference then? Not much. With a covered call, if the option expires worthless, you still keep your stock and you can repeat the process. The naked put sale does not involve any stock transactions. If the put expires worthless, you can also repeat the process. The covered call requires two transactions with two commissions. The naked put sale requires only one commisssion. The covered call requires you to spend the cash on the 100 shares of stock, which can be expensive. The naked put requires no outlay of cash and you receive the credit right into your account. And at times, put options usually have higher implied volatilities than calls because of the downside fear factor. So you may get more bang for your buck by selling a put. So why won't your broker let you sell naked puts? Once again, because of the downside fear factor and the "unlimited loss" potential. Just the word "naked option" is taboo for most brokers. You can get around this obstacle only if you have a large trading account and years of trading experience that satisfies the broker. You can even try to argue with your broker that both strategies are the same, but most of them still won't go for it. The naked put can also be used as a strategy to acquire a quality stock at a discount from today's price while receiving a credit into your account. If you want to own IBM at $100 but it's trading at $125 today, you can sell a $100 put for $3 (example)and wait to see what happens at expiration. If IBM is above $100 at expiration, you keep the $3 credit but you don't get to buy IBM at $100. If IBM is trading under $100 on expiration day, you will acquire 100 shares of IBM for $97 ($100 - $3 initial credit). That's a great way to acquire a stock you want to own at a cheaper price. And you get paid to wait for the price to come down. With a covered call, some people already own the stock from a prior period, so the sale of the call essentially reduces your initial cost basis. For those who are speculating with covered calls, then you must buy the shares first and then sell the call. Hence, the two transactions. The same scenario applies to selling covered puts and selling naked calls. If you sell 100 shares of stock and sell a put for upside protection, it's the same as selling a naked call. With the covered put, your upside loss is totally unlimited because of the short stock, and the downside profit is limited once you hit your short put. With a naked short call, your downside profit is limited to the premium received, and the upside risk is again unlimited. The same rules apply to the number of transactions for these strategies as well. Two commissions for the covered put, and one commission for the naked call. Slightly off the subject here, but someone e-mailed a question recently about buying calls and selling puts. What's the difference they asked. Yes, both strategies are bullish in nature, but that's where the similarity ends. When buying the call, your risk is limited and your reward is unlimited. When selling the put, your risk is unlimited and your reward is limited. That's a big difference for most people. Selling any option(call or put) has unlimited risk, but the decay factor is on your side and that's why people like to sell options. But once again, you could lose everything you own when you sell options. When you buy an option, you may lose, but you'll never lose more than what you paid for the option. Time is against you when you buy options, so timing is critical too. Back to the synthetics. Here's a list of equivalent positions: (Note that all option strikes must be the same and same month of expiration.) long put + long stock = long call long call + short stock = long put short put + short stock = short call short call + long stock = short put long put + short call = short stock short put + long call = long stock Let's take one of these equations and see how it works: long call + short stock = long put. The characteristic of a long put consists of unlimited profit on the downside and limited loss on the upside(the cost of the option). Now if you happen to be short 100 shares of stock, you can buy a call against it to cap your loss on the upside. But your downside profit is unlimited because you're short the stock which will keep making money on the downmove. You will lose money on the long call, but you can't lose more than what you paid for it. And if the price of the stock keeps dropping, your short stock profit will eventually overtake the loss on the long call. It's the same as owning a put option outright. long 1 IBM July $100 call + short 100 shares IBM = long 1 IBM July $100 put. Let's look at the outcome of the equation first, the IBM $100 put. If IBM trades below $100, you make unlimited money on your long put once you pass your breakeven. If IBM trades above $100, your put will expire worthless, but you lose no more than the price of the option. Limited loss, unlimited profit. If you are short 100 shares of IBM, your profit is unlimited on the downside once you pass the breakeven price. Your loss is limited on the upside once your long call goes in-the-money. Limited loss, unlimited profit. Just note, whatever strike price and expiration is used in the equation, the resulting option will always have an equivalent strike and expiration. Most of you are probably wondering why anyone would make the two transactions in the equation instead of just doing the one. It comes down to mispriced options and arbitrage opportunities. This is a much more advanced topic and mostly concerns floor traders who can quickly take advantage of these discrepancies. But for most of us off-floor traders, stick with the naked put/ covered call scenarios if allowed by your broker. For anyone still interested in exploring the other synthetic equations, check out Sheldon Natenberg's book, "Option Volatility and Pricing Strategies". Good luck. Contact Support ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Thursday 5-4-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ***********************Advertisement**************************** fnCentral.com: it's where you are! Be deskbound no more. No software to buy or learn. Use the web's first fully integrated personal finance manager from any PC, PALM, phone, internet appliance! Manage your money. Consult with CPAs. Estimate taxes. Track investments. fnCentral.com. It's where you are! OPEN A FREE ACCOUNT NOW! http://www.fncentral.com/cgi-bin/ad?from=op504 **************************************************************** ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10413.12 77.87 -80.66 -250.99 -67.01 -320.79 Nasdaq 3720.24 97.42 -172.63 -78.14 12.97 -140.38 $OEX 756.81 9.70 9.70 -18.07 -4.37 -3.04 $SPX 1409.38 15.82 15.82 -31.19 -5.72 -5.27 $RUT 501.91 12.68 -13.58 -9.79 6.36 -4.33 $TRAN 2794.96 8.67 -16.15 -62.23 -1.49 -71.20 $VIX 35.43 -1.54 3.55 3.64 0.92 6.57 Calls Mon Tue Wed Thu Week EPNY 90.94 18.57 6.75 -0.88 0.44 24.88 New EMLX 62.63 2.46 5.41 4.75 4.63 17.25 New AFFX 150.09 8.94 -7.44 2.41 11.13 15.04 New KANA 48.56 3.75 3.00 -3.56 2.81 6.00 Upgrades AMD 90.50 0.88 1.31 -1.75 2.75 3.19 Strong BRCM 175.31 1.88 7.75 -6.06 -0.63 2.94 Semis SFE 44.75 7.63 -5.75 -0.94 1.69 2.63 5/10 earn NOC 73.38 2.63 -0.56 -1.88 2.31 2.50 Waffling ARBA 76.56 9.75 -9.38 3.56 -1.56 2.38 Hot B2B SCMR 79.19 7.69 -4.13 -5.31 2.44 0.69 low vol TIBX 89.59 3.69 -8.31 -1.31 6.47 0.53 On track DHR 55.50 1.75 -1.13 -1.44 -0.81 -1.63 Dropped QCOM 106.69 1.31 3.94 -2.75 -4.25 -1.75 Rumors?? GE 154.00 2.13 1.69 -5.00 -2.06 -3.25 Dropped TER 104.94 -0.69 -1.31 -7.81 4.75 -5.06 Turning NTAP 67.88 -2.94 -5.75 1.50 1.13 -6.06 5/18 earn ADBE 113.94 9.75 -15.19 -2.75 1.19 -7.00 Entry?? GM 86.56 -0.94 0.69 -5.31 -1.50 -7.06 Dropped MERQ 82.31 -1.25 -4.31 -2.50 0.38 -7.69 Turning CMGI 63.06 -1.75 -7.13 -0.31 1.00 -8.19 Held $60 RMBS 204.69 2.94 -23.44 -10.00 5.19 -25.31 Comeback JNPR 183.00 6.25 -21.06 -3.00 -11.88 -29.69 At support Puts CTXS 45.50 -5.06 -7.38 -4.06 0.94 -15.56 Still bad SNE 219.75 5.75 -6.32 -5.31 0.00 -5.88 New BOBJ 94.63 2.93 -5.94 -3.50 3.25 -3.25 Recovery? LOW 47.38 2.50 -1.13 -2.88 -0.63 -2.13 Sector ADRX 55.38 2.75 -2.13 3.44 0.13 4.19 Dropped HNZ 38.38 0.19 -0.25 3.69 0.75 4.38 Dropped PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** DHR $55.50 -0.81 (-1.63) Finally succumbing to the broad market weakness, DHR just ran out of buyers. We've been concerned about the low volume over the past week, and it looks like it finally caught up with our play. We were counting on DHR to bounce at support near $56 (also the site of the 10-dma), but it wasn't to be. Dropping hard at the open today, DHR tried to recover in the afternoon, but just didn't have enough momentum to get back over $56 and rolled over at the end of the day. With the deteriorating market picture and failure at a key technical level, we have to let DHR go tonight. GM $86.56 -1.50 (-7.06) Plagued by interest rate fears, GM's engine has been sputtering over the past couple days. Investors are nervous about the direction of the market and without fresh fuel to motivate buying, shares of GM have followed the broad market lower. The opening weakness dropped GM to support at $90 yesterday, and as the day progressed, sellers won out over buyers and pushed shares of the auto maker to the next support level at $88. The late-day bounce enabled the stock to close just above this support level, but the weakness continued today, bringing GM down to close at $86.56, very near the low of the day. As if that weren't enough, volume in GM has been strong over the same period while volume in the overall markets has been lethargic. Put it all together and it doesn't look good in the near term--we'll get off here and wait for another ride going in our direction. GE $154.00 -2.06 (-3.25) Ankle weights? How else could you get a good swimmer to sink? The fact is we never saw a good entry point on GE that would give us a payoff by Friday (the day GE effects its long awaited 3:1 split), thanks to the May 16th FOMC worries. While $155 held as support yesterday, today's anemic market kept GE's volume on the low side and sent the stock as low as $153. Since GE mirrors the whole market, and whole market is having trouble treading water, without volume we just aren't getting the performance from GE we wanted. If it weren't for tomorrow's split that takes place after the close(and veteran readers know we never hold over a split since stocks more often than not go into a post-split depression), we'd be closing this play anyway from lack of performance. In a sideways to down market and buyers apparently on strike, rewards are harder to come by from event trading(splits, earnings). PUTS: ***** ADRX $55.38 +0.13 (+4.19) We held this put play on Tuesday because it tanked over $2 in the final ten minutes of trading. Yet on Wednesday, the sentiment changed as ADRX gapped up and continued higher, finding support at $54. The test of $50 that we were anticipating was looking less and less likely. Today's light trading in this issue gave support at $52 and it closed out strongly. Given how these last two days went, we have lost faith in this put as the $50 level remains elusive. We gave it some time but this slow mover is now a drop. HNZ $38.38 +0.75 (+4.38) Our put play in HNZ took a turn for the worse in the past two days. It all began late Tuesday when Dutch food giant Unilever (UL) bid $18.4 mln for Bestfoods (BFO). Analysts said that the bid from Unilever may spark a wave of consolidation in the U.S. food industry. Shares in several U.S. food companies surged after the news, including HNZ. Eric Katzman, food industry analyst with Merrill Lynch said, "From an industry perspective, this is the consolidation catalyst that investors have been anticipating." With a market cap of $14 bln, HNZ is seen as a prime takeover target or merger candidate. The global food industry has faced slow sales growth for the past decade. Executives are under pressure to expand markets and cut costs. As consolidation sweeps through the food sector, it's time to get out of the way, and look for something else to chew on. ******************** PLAY UPDATES - CALLS ******************** AMD $90.50 +2.75 (+3.00) Look at the beautiful daily chart! After a rough day on Wednesday, AMD came back strong today, even as volume remained weak across the board. AMD found key support just above its 10-dma at $85.88; its low was $86. The trend is intact and continues on, as the Semiconductor Sector($SOX) leads the market. AMD had a decent day considering volume was weak and that they actually received a downgrade today. Yep, a downgrade! Can you believe that? Josephtal & Co. lowered its rating from a Buy to a Hold. Hey, why don't you jump out in front of a steaming freight train while you're at it! Obviously, investors shook off that news, if they ever even noticed it in the first place. Looking at the technicals, short term support lies at $86 and $84. Resistance above will come at $92 and then its all-time high of $92.38. Target shoot on the dips for entry points based on individual risk levels. KANA $48.56 +2.81 (+6.00) Despite a quiet market, KANA is quietly inching higher. It did sell-off with the market on Wednesday, but recovered most of that loss today and the pattern of higher-lows is still intact. Some thanks is due to Chase H&Q who upgraded KANA from a Buy to a Strong Buy this morning. This is the second upgrade this week after Goldman Sachs placed KANA on the Recommended List on Tuesday. Today's news pushed the stock above $50 briefly at the open before giving way to this continuing trend of little to no volume across the NASDAQ. A breakout over $50 on volume should push the stock back to $55 so consider such a move as a potential entry point. Support at $45 looks rock solid if bad economic numbers rock the markets tomorrow. Just make sure it gives you a bounce first. JNPR $183.00 -11.88 (-29.69) To sell...or to buy more? That is the question. JNPR sold off again today, pushing the stock right back to support at $180. Fortunately, it held that level as buyers stepped in, which is confirmed by the volume. This is the reason we want to keep JNPR on the call list and give it a chance to rebound. Anyone who knows JNPR well, knows that the bounces are big and worth a little extra risk to capture such a move. Just don't let it get away if JNPR starts to breakdown below $180. That is the point we will be watching as being a reversal and time to exit. No special news out there to justify the recent downdraft so play it based on technicals. Resistance at $200, support at $180. NOC $73.38 +2.31 (+2.50) NOC will receive an award from the Department of Defense Friday. The Integrated Systems division of NOC is being recognized for achieving $13.1 mln in annual cost savings by implementing process initiatives. The award stems from NOC's efforts to streamline operations, cut costs, and ultimately boost earnings. The good news Wednesday didn't help NOC as the stock fell with the broad market weakness. But the buyers returned Thursday to lift NOC back above its 5-dma and close the stock near its day high. Like the rest of the market, volume in NOC has been anemic. We'd like to see more buying interest to confirm the advances, but we'll take any gains we can get. NOC will face resistance at $74 before retesting its 52-week high. We saw some buying late Thursday afternoon, if the buyers show up Friday morning, NOC might be able to take out resistance. Watch for a move above $74 as a possible entry point. The stock has found support twice at $71 in the past week. If NOC's stumbles Friday morning, look for a bounce off support as another possible entry point. TER $104.94 +4.75 (-5.06) A downgrade never helps a call play, especially combined with weakness in every tech sector. Josephthal & Co downgraded TER from a Buy to Hold on Wednesday. The analyst with Josephthal downgraded TER because the stock had reached their target price. Anyway, the downgrade and weakness in the semis pushed TER down to $97 Wednesday, then the buyers stepped in. Volume surged in the last hour of trading as the stock recovered lost ground. The momentum carried over into Thursday as TER edged past $105 in early trading. That level proved to be resistance for the rest of the day as TER bounced between $102 and $105. We were expecting the release of sales numbers for the semis Thursday, but the report was delayed. We'll continue to watch for the release of the March sales report. An event that may carry TER higher is the earnings report from semi behemoth AMAT, scheduled for next week. We'll want to watch TER closely early Friday morning. If the stock clears resistance at $105, we could see smooth sailing up to the $110. There is very little resistance standing in the way after Wednesday's sell-off. But if we get some nasty economic data Friday, TER will most likely find support at $102.50 and again at $100. Look for entry points if TER moves above resistance, or bounces from support. Consider your risk level before entering the play, and confirm direction in other semis such as AMAT, LRCX, and KLAC. ADBE $113.94 +1.19 (-6.50) Investors fled the technology sector Wednesday as fears of inflation combined with a profit warning from Novell (NOVL) sent tech stocks tumbling. The enterprise software maker NOVL said it would fall short of Wall Street expectations. ADBE also suffered from additional weakness in MSFT. The uncertainty surrounding Mr. Gates and company continues to hamper the software sector. With all the negative news and weakness in the tech sector, ADBE managed to remain within its ascending channel. The bottom of the range was hit Wednesday when ADBE sank just below $105. Traders decided that was far enough, as a wave of buying rescued ADBE late Wednesday. The buying interest carried over into Thursday's trading as ADBE touched $115 before selling-off later in the day. Every time ADBE has hit the bottom of its trading range in the past month it has quickly rebounded to retest its highs. This may prove to be a good buying opportunity, but we want to proceed with caution ahead of the economic data out Friday. From here, look for a bold move above resistance at $115 as a possible entry point. Additionally, if the market weakens Friday morning, look for a bounce off support at $110. ARBA $76.56 -1.56 (+2.38) Keeping the upward trend intact, ARBA is actually looking pretty good this week. In the face of the wild market gyrations yesterday, the stock bounced repeatedly at $73 before moving sharply higher as the NASDAQ recovered late in the day. The recovery continued this morning, but unfortunately there wasn't enough follow through and the stock rolled over again at the $83 resistance level. ARBA is presenting us with a bullish technical pattern that is usually very reliable. While the highs are running into the same resistance level, the stock is posting consistently higher lows right on the ascending trendline. ARBA is perched between the 5-dma ($77.50) and the 10-dma ($72.38), and looks like it will break out to the upside in the next 3-4 trading days as the resistance line and ascending trendline converge. Look to enter new positions as ARBA bounces from the $73-74 level, confirmed by increasing volume. If you want to play it a little more conservatively, wait for buyers to push the price through resistance before moving in to profit from the breakout. CMGI $63.06 +1.00 (-8.19) After having the rug pulled out from under its feet early in the week, CMGI is showing good support at $62 as the 10-dma hovers at $62.50. The afternoon meltdown on the NASDAQ yesterday afternoon pushed shares of the Internet incubator company below $59, but the rebound was quick and decisive, coming on strong volume. Continuing higher this morning, there were not enough buyers to push through the $65 level, but the sellers were not powerful enough to break support again for the remainder of the day. Volume in the markets remains light and this is reflected in stocks like CMGI which posted a very light volume day at only 3.7 million shares. Possibly contributing to the strength today was positive news from AltaVista, the premier Web-wide knowledge resource on the Internet. CMGI holds a majority ownership in the company, and the announcement of technology advancements and new product launches targeted at Web enthusiasts should serve to support CMGI going forward. Use intraday dips to support as opportunities to open new positions, but watch the volume; it continues to be a good indicator of the strength of price moves, whether up or down. SFE $44.75 +1.69 (+2.75) The uncertainty continued the past two days in SFE and the overall markets. SFE did drift lower early yesterday, then turned sideways through the close today. The pattern developing in the intraday charts shows higher lows and higher highs since Wednesday's bounce near the $40 level. The last fifteen minutes of today's trading provided encouragement as well. Over 77,500 shares were traded as SFE approached the $45 mark. Not huge volume, but the most seen in any 15 minute period all day. Could it be our play is starting an earnings run? Perhaps, SFE is due to report earnings before the open on Wednesday, and will hold their annual stockholders meeting on Thursday. Normally, we would suggest the move late today set SFE up as a solid buying opportunity, and it very well could. However, with the economic data due out in the morning all bets could be off, if its a negative report. If investor sentiment is positive in the morning we would look for chances to jump in. Technically, support is found between $41 and $42, and any further bounces accompanied by better volume could also be viewed as a chance to participate. NTAP $67.88 +1.13 (-6.06) As we said Tuesday the profit taking could continue, and it did to some extent yesterday. NTAP fell about $4 yesterday to support at $61.50 and found buyers ready to take their turn. Have we put in a short-term bottom? For now it would appear that NTAP has caught its breath, and could be setting up for a bit of a rally. However, don't pin your hopes on the volume, at least at this point. With only 2.9 mln shares traded today, the number of buyers wasn't exactly staggering. Several things could affect the moves in NTAP in the upcoming days. First, the FED fears and economic data due out tomorrow and next week. On a more positive note the networker is scheduled to report earnings May 18th after the close. At current levels NTAP could be viewed as a great buying opportunity and make a move higher into earnings. If negative sentiment or empathy continues to apply pressure to the markets, then we could have a tough road to hoe. More conservative investors may want to wait for a breakout over $70 accompanied by volume before entering new positions, while target shooting at current levels would be acceptable as well. A decline below $65 and a retest of recent lows maybe ahead. RMBS $204.69 +5.19 (-25.31) The knife fell a little further than we thought, but it did finally stick at $185. The bounce late Wednesday did provide a good entry point for a new play. Now the question of to sell or hold, may be the running through the mind of those that jumped in. Well, that's a matter of personal preference. After the spike up to $217 early today RMBS remained range bound between $200 and $210 for the balance of the session. The plus we see at this point is the volume did pick up the last two days, on the selling yesterday and the buying today. Another potential positive for our play is the upcoming special board meeting on May 23rd. The board has asked for an increase in the number of authorized shares, and if approved, would result in a 4-for-1 split of the company's stock. Another potential plus is that the sentiment in the $SOX index is improving somewhat. However, with the lack of volume in the broader markets we would be careful about hanging our hat on sentiment until the numbers improve. Support is now sitting at $200 and yesterday's low at $185. A move up through $215 and we may see a new trend develop. MERQ $82.31 +0.38 (-7.69) Ok, so it's been like watching paint dry the past two days. The real positive about this one, at least for now, is how the $80 level has held. Granted the number of folks trying to push the price lower hasn't been that strong, but the fact there has been buying show up really is a plus. Also a bit of good news came in the form of a recommendation from Goldman Sachs. After doing so much damage to the retail sector yesterday, analysts at Sachs initiated coverage of MERQ, adding the company to their Recommended List, and projected a price target of $110. They feel MERQ has the unique ability to offer a full range of products aimed at eBusiness application testing and performance monitoring. Another tidbit to keep in the back of your mind is the upcoming annual stockholders meeting on May 24th. The company has asked for approval to increase the number of authorized shares to 240 mln. If the buying boycott ends in the broad markets we would look for MERQ to fly. If not, continued bounces off the $80 area may provide a good entry as well. SCMR $79.19 +2.44 (+0.69) Following Tuesday's downdraft we noted that you may want to consider getting out if the price dipped under $78 with the idea of getting back in at the 5-dma support (then $74.73). If you did, congratulations, especially if you sold at the open this morning when SCMR reached $83 despite this currently flat market. Alas, volume remains low, which means range-bound trading is likely to continue until something gives investors a reason to buy. Maybe that reason could be CSCO earnings on May 9th, which might have a sympathy play effect on SCMR. If that isn't enough, SCMR itself has earnings on May 18th, and we may be lucky enough to see an earnings run. Of course, the broader market still may keep a lid on the upside unless some fabulous employment news comes out tomorrow. Historical support still remains around $74, however the 10-dma of $72.55 may make a better target at which to shoot if the market remains in a funk. Conversely, the 5-dma of $80.54 is now above the current price and may offer slight resistance. The good news is that SCMR has sloughed its neutral wedge in favor of an ascending wedge--a breakout with volume may be near. TIBX $89.59 +6.47 (+0.53) Did you set your stop? TIBX had plenty of room to fall given the 10-dma way back under $75. It fell right through in yesterday's trading, touching a low of $72. OUCH! However, near yesterday's close and continuing today, TIBX staged a strong comeback and even cleared mild resistance at $88. Nonetheless, volume remained just average telling us there is no major conviction with this move. The next resistance is $95. Intraday support is at $84.50, however the 10-dma, currently $80.86, has been holding up nicely over the last 10 trading days. Now that TIBX has moved back into (on the low side) its ascending channel, target shoot where you are comfortable. While there is no TIBX specific news, but CSCO, which owns 7% of TIBX, has woven TIBX software into some of its new equipment and will report earnings on May 9th. What's good for CSCO should also be good for TIBX. BRCM $175.31 -0.63 (182.00 +7.75 (+9.63) Another day, another chip--that's all we ask! Following up Tuesday's announcement of an new optical chip, today, BRCM unveiled a 2-way set top box chip, further blurring the line between TV and PC. Presumably, it could also function to allow telephone calls to be made over existing cable systems. Anyway, pesky resistance at $180 is proving hard to penetrate in this sideways to down market. Volume too tapered down telling us there is no conviction to carry this issue higher right now. However, any change in market sentiment should propel BRCM higher. It has already tested $165 support and won. In our opinion, that was a buying opportunity given the low volume and solid rebound. It finished solidly off today's low too. Intraday support at $170 provides a nice target at which to shoot. Resistance remains strong at $180, then $185. While earnings aren't coming around again until July, BRCM is a split candidate. Watch for tomorrow's employment numbers first before taking a position. They could change the whole market sentiment. QCOM $106.69 -4.25 (-1.75) Just when we thought it was safe to get back in the water, the new bullish trend on QCOM takes a breather. The QCOM story is still good. But even a helium balloon goes down in a descending elevator. In short, the issue like most others is suffering from lack of volume borne of FOMC rate hike fears ahead on May 16th. Buyers are on strike. Now, as for the rumored news that NOK would make a buyout bid for QCOM, there doesn't appear to be any credible evidence that will happen, which may also account for QCOM's slip in volume to just 60% of its ADV, and corresponding slip in price. QCOM has good support at $105, but can easily slip under $100(also good support) in a downdraft. Currently it sits just a whisker over its 10-dma of $106.43. If it holds and the market rebounds, you can consider an entry at current levels. However, you may want to target shoot for the best entry at $100 support(or less) if we get a selloff based on bad employment figures. Mild resistance is $113, then $120. Confirm market direction first. ******************* PLAY UPDATES - PUTS ******************* BOBJ $94.63 +3.25 (-3.25) Yesterday, BOBJ traded down with the rest of the market, hitting a low of $88.88. It was at this point in the day that the NASDAQ made a strong rebound from its 3600 level, bringing with it most of the tech issues. Today, the buying continued, taking the stock as high as $97.50 where it could not hold. By midday, BOBJ had rolled over and traded tightly around $93.50. A late session surge over $95 could not be sustained and has BOBJ perched on its 100-dma of $94.38. Its 10-dma of $96.44 remains above the current levels. BOBJ may encounter resistance at the 10-dma, and certainly above that at $100. Target shoot for aggressive entry on short term spikes. More conservative entries can be taken once BOBJ asserts itself below it 100-dma. CTXS $45.50 +0.94 (-15.63) A cold earnings warning from enterprise software maker Novell (NOVL) sent a shiver through the software sector Wednesday. Additional weakness in MSFT also added to the CTXS's problems. The stock hit a low of $42.31 Wednesday afternoon before being carried higher by the rash of buying late in the day. CTXS released several pieces of news Thursday. In two separate press releases, the company said it expanded its licensing agreement with RSA Security, and established a contract negotiation mechanism with several large Application Service Providers. The press releases may have acted as a cushion Thursday, preventing CTXS from falling further. Noting the weak volume Thursday, the rally may be a bit artificial. Down volume has far outpaced up volume in the past week. With that said, we're looking for more downside from here. Two possible entry points to watch for would be a breakdown below support at $45, or for a more conservative entry, a breakdown below support at $42, either way confirm any downward move with heavy volume. LOW $47.38 -0.63 (-2.13) We see two things occurring in this play. First, yesterday's downgrade of the retail sector by Goldman Sachs added profits for those who took advantage of Tuesday's bounce to the $52 area and bought puts. The second thing showing up on the radar screen is the lack of any real follow-through selling today. So what's all this mean. Well the trend is still south. However intraday charts show a stock that's trying to find a bottom. Does that mean the play is over? Absolutely not. It means no one is willing to step up and buy, but it also suggests sellers are taking a break, for now. There is little support between the current price and the $40 mark. All it will take is a move below $46 and things could get ugly. If buyers do show up we would again look for resistance in the $52 area. Keep in mind Lowe's is scheduled to report earnings, on May 15th, so any good news that comes in the market could give the hardware company a boost. ************** NEW CALL PLAYS ************** EMLX - Emulex Corporation $62.63 +4.63 (+17.25 this week) Emulex designs three types of network connectivity products: network access servers, printer servers, and high-speed fibre channel products. Its LightPulse fibre channel adapters and hubs provide high-performance interfaces for computer networks. EMLX's network access servers enable remote access to WANs, and its printer servers connect directly to LANs, enhancing network performance. EMLX sells its products mainly to equipment manufacturers and distributors. IBM and Compaq account for 19% and 14% of sales, respectively. Like Dennis Rodman, EMLX knows how to rebound. Since hitting bottom during the mid-April meltdown, EMLX has gained nearly 50% in the last three weeks. In the face of the weakening tech sector, EMLX has shown unprecedented relative strength. Thursday marks the fourth straight day that EMLX has charged higher. Unlike every other stock on the NASDAQ, EMLX has managed to climb higher on heavy volume. In fact, traders exchanged nearly three times the ADV on Thursday. What we're looking for from EMLX is for the stock to fill its gap down from April 14th. EMLX closed the previous day at $83, the stock subsequently gapped down and opened at $63 on the 14th. That means there is very little resistance, if any, preventing EMLX from bolting higher, and filling its $20 gap. EMLX cut into the empty void Thursday by reaching a day high of $65.88. If we get some cooperation from the employment number scheduled to be released Friday, EMLX could take-off. A word of caution though, the economic data is a double-edged sword. If the numbers spook Wall Street Friday morning, and inflation rears its ugly face, traders may lock in their profits from EMLX's recent rally. If EMLX falls to profit taking, the stock will find support at $60 and again at $57.50. The name of the game here is be on your toes, and pick your entry point carefully. Watch for a strong move above $65 and confirm with heavy volume. EMLX's competitors such as BRCD and NLCS showed solid gains Thursday. The strength in the computer-networking sector could pave the way for a strong rally. With one the highest EPS and relative strength ratings in the sector, and a relatively low P/E ratio, investors feel EMLX is oversold at its current levels. BUY CALL MAY-60*UMQ-EL OI=894 at $6.50 SL=4.50 BUY CALL MAY-65 UMQ-EM OI=379 at $5.00 SL=3.00 BUY CALL MAY-70 UMQ-EN OI=340 at $4.00 SL=2.50 BUY CALL JUN-70 UMQ-FN OI= 57 at $9.25 SL=6.25 Picked on May 4th at $62.63 P/E = 82 Change since picked 0.00 52-week high=$225.50 Analysts Ratings 2-4-1-0-0 52-week low =$ 11.13 Last earnings 03/00 est=0.18 actual=0.20 Next earnings 08-07 est=0.20 versus=0.10 Average Daily Volume = 2.69 mln /charts/charts.asp?symbol=EMLX AFFX - Affymetrix Inc. $150.09 +11.13 (+15.03 this week) AFFX has established itself as a worldwide leader in the field of DNA chip technology. The Company has developed and intends to establish its GeneChip system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with probe arrays, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The company sells its products to Drug and Biotech companies involved in gene research. The free-fall in the Biotech sector, which began in early March, finally reached bottom in mid-April. And stocks like AFFX are leading the recovery. Providing the products and information needed by companies involved in genetic research, AFFX is well positioned to profit from the growth in the sector, much like companies like CSCO and EMC are profiting from the growth of the Internet. Dropping from a high of $327 to a low near $85, AFFX has recovered nicely in the past 3 weeks. Moving steadily higher, supported by the revival in the Biotech sector, the stock is posting higher highs and higher lows on average volume. Although volume is not that strong, it is a good sign in light of the very light volume which is pervading the broad markets as they anticipate the next interest rate increase. Still trading more than 50% off the highs of two months ago, AFFX has moved through resistance between $130-135 and we need to see this level hold as support going forward. The strong move today has pushed AFFX solidly above the 200-dma ($140.50) and is reinforced by the 5-dma ($141) which has now crossed through the 200-dma. New entries can be considered as AFFX pauses to consolidate above the 200-dma and intraday dips are buyable as long as this support level holds. AFFX is sitting right up against resistance at $152, and the next level to break through will be $160. A more conservative entry approach would be to wait for AFFX to confirm the strength of its current move by breaking above current resistance before playing. GeneLogic Inc., a leading provider of genomic information, announced on Monday that they will exercise an option in their GeneChip agreement with AFFX to include access to custom GeneChip probe arrays. GeneLogic will provide proprietary information from its internal sequence database to AFFX so that the company can design and manufacture a series of custom arrays. These custom arrays will allow AFFX to expand their current 60,000 human gene set, which consists of current sequences emerging from the Human Genome Project. BUY CALL MAY-150*FIQ-EZ OI=947 at $15.13 SL=11.00 BUY CALL MAY-160 FUE-ES OI=144 at $11.13 SL= 8.25 BUY CALL MAY-170 FUE-ET OI=212 at $ 8.00 SL= 5.75 BUY CALL JUN-150 FIQ-FZ OI= 54 at $26.50 SL=19.75 SELL PUT MAY-135 FIQ-QG OI= 12 at $7.13 SL=10.00 (See risks of selling puts in play legend) Picked on May 4th at $150.09 P/E = N/A Change since picked +0.00 52-week high=$327.00 Analysts Ratings 2-6-2-0-0 52-week low =$ 32.50 Last earnings 04/00 est=-0.26 actual=-0.14 Next earnings 07-20 est=-0.12 versus=-0.32 Average Daily Volume = 1.07 mln /charts/charts.asp?symbol=AFFX EPNY - E.Piphany Inc.$90.94 +0.44 (+24.88) E.Piphany, Inc. is a provider of web-based software solutions that enable companies to get, keep and grow customer relationships. The E.Piphany E.4 system is an integrated suite of software solutions that allow businesses to collect, analyze and act on customer data from existing software systems as well as third-party data providers. Business users throughout the company have the ability to continuously identify and differentiate customers, then customize and personalize products, services and interactions based on customers' wants and needs. E.Piphany, Inc. is headquartered in San Mateo, California. Talk about holding up well under pressure, this CRM(customer relationship management) software maker has moved up $21 since Monday's open while the rest of the NASDAQ market has shed 210 points. EPNY has been a clear winner in this sideways market, especially since hitting a recent bottom at $43 on April 17th, when it beat the Street's earnings estimate by 38%. Revenues were up over 61% sequentially and over 660% from last year. It doesn't hurt that it's also a member of the B2B infrastructure sector, which has held up well in recent days (see TIBX) too. HWP, CSCO, and EK all use its products. Technically, EPNY is really strong and has held its 5-dma, currently $84.70, all this week, while other tech stocks got killed. Thus, in addition to its big time ramp up, it has relative strength too. Historical support is at $65 and $80. More recently support can be found intraday at $85 and $87. Resistance is at $100. EPNY is however extremely volatile and can have $20 price swings, even in the current flat market with low volumes. If you are not well- seasoned in this kind of environment, you may want to pass the trade up in favor of something more stabile--THE SPREADS ARE HUGE!!!. We suggest target shooting to get the best entry. Just be sure you see a bounce first so that the price doesn't continue south after you take a position. Not much in the news. Even the company web site hasn't posted an article since April 17th earnings. BUY CALL MAY- 80*PEY-EP OI=187 at $16.75 SL=12.00 BUY CALL MAY- 90 PEY-ER OI=111 at $10.63 SL= 7.75 BUY CALL MAY-100 UEP-EU OI=201 at $ 6.50 SL= 4.50 BUY CALL JUN-100 UEP-FU OI= 55 at $11.75 SL= 8.75 SELL PUT MAY- 80 PEY-QP OI= 1 at $ 3.13 SL= 5.00 (See risks of selling puts in play legend) Picked on May 4th at $ 90.94 P/E = N/A Change since picked +0.00 52-week high=$324.88 Analysts Ratings 3-4-0-0-0 52-week low =$ 38.00 Last earnings 04/00 est=-0.22 actual=-0.16 surprise=38% Next earnings 07-17 est=-0.16 versus= N/A Average Daily Volume = 578 K /charts/charts.asp?symbol=EPNY ************* NEW PUT PLAYS ************* SNE - Sony Corporation $219.75 +0.00 (-5.88 this week) If you like to be entertained, Sony has your fix. Its PlayStation home video game system alone accounts for about 11% of the electronics and entertainment giant's worldwide sales. As the #2 consumer electronics firm, SNE makes a host of products including cameras, DVD players, MiniDisc and Walkman stereo systems, computers, TVs, and VCRs. Rounding out the company's assets are Columbia TriStar and record labels Columbia and Epic. Remember a couple months ago when SNE saw their share price drop right after the release of the new PlayStation2? Well, the problems that appeared shortly after the game unit's release have yet to be resolved. With the wide range of products and services provided by SNE, you'd think there has to be more to the story than that, and you'd be right. In case you've forgotten, we are still in earnings season, and SNE had a less than stellar report in late April. Profits for the latest fiscal year fell 32%, led lower by a 43% decline in operating profits for SNE's game unit. The drop was largely due to startup and launch costs of the new PlayStation2. Although sales continued to be strong across most of the company's product lines, the strength of the yen served to impact revenues outside of the Japanese market. Taking another shot at their own feet, company officials stated that they expect higher sales revenues in the year ahead, but are expecting a drop in net profit. This is not the type of pronouncement that motivates investors, and the results, although not surprising, can be seen in the stock chart. Stuck in a continuous downtrend since late March, SNE was finding support at $225...until yesterday that is. Instead of bouncing at support, the share price continued down, not even pausing until reaching the $218 level. Along with the broader markets, SNE is seeing anemic volume, barely half of the ADV--even though it is more than 30% off its highs of only 2 months ago, nobody is in a rush to buy the shares at these levels. Resistance will likely be found at $225, followed by $234, and any bounce to these levels should provide an attractive entry point. BUY PUT MAY-220*SMW-QD OI=103 at $9.50 SL=6.75 BUY PUT MAY-210 SMW-QB OI=118 at $5.50 SL=3.50 Average Daily Volume = 395 K /charts/charts.asp?symbol=SNE ********************** PLAY OF THE DAY - CALL ********************** MERQ - Mercury Interactive Corp. $82.31 +0.38 (-7.31 this week) Mercury Interactive Corp. is the leading provider of Web performance management solutions that help e-businesses deliver a positive user experience. Mercury Interactive solutions enable its customers to turn Web application performance, scalability and user experience into competitive advantage. The company's performance management products and hosted services are open and integrated to best test and monitor business-critical Web applications. Most Recent Write-Up Ok, so it's been like watching paint dry the past two days. The real positive about this one, at least for now, is how the $80 level has held. Granted the number of folks trying to push the price lower hasn't been that strong, but the fact there has been buying show up really is a plus. Also a bit of good news came in the form of a recommendation from Goldman Sachs. After doing so much damage to the retail sector yesterday, analysts at Sachs, initiated coverage of MERQ, adding the company to their Recommended List, and projected a price target of $110. They feel MERQ has the unique ability to offer a full range of products aimed at eBusiness application testing and performance monitoring. Another tidbit to keep in the back of your mind, is the upcoming annual stockholders meeting on May 24th. The company has asked for approval to increase the number of authorized shares to 240 mln. If the buying boycott ends in the broad markets we would look for MERQ to fly. If not, continued bounces off the $80 area may provide a good entry as well. Comments Hellooooo, $80. One look at a chart of MERQ for the week and you can see that it had no intention of trading below $80 in this most recent retracement. The stock held firm at this support level accompanied by good volume. Now it appears to be rounding out which suggests the next move is up. The one wild card will be the Jobs report due out before the open on Friday. A negative impact could rock the markets and stifle any call plays on any stocks. The flip side of the coin is the VIX which hit 36 today, meaning a relief rally may be imminent despite the economic numbers. BUY CALL MAY-80*RQB-EP OI=459 at $8.00 SL=5.50 BUY CALL MAY-85 RQB-EQ OI=217 at $6.25 SL=4.50 BUY CALL MAY-90 RQB-ER OI=350 at $3.50 SL=2.00 BUY CALL MAY-95 RBF-ES OI=173 at $2.88 SL=1.38 BUY CALL JUN-90 RQB-FR OI= 40 at $8.50 SL=6.00 Picked on Apr 16th at $58.75 PE = 205 Change since picked +23.56 52-week high=$134.50 Analysts Ratings 9-3-1-0-0 52-week low =$ 12.25 Last earnings 04/00 est= 0.11 actual= 0.10 Next earnings 07-13 est= 0.12 versus= 0.09 Average daily volume = 1.55 mln /charts/charts.asp?symbol=MERQ ************************ COMBOS/SPREADS/STRADDLES ************************ Title: No Optimism In The Pits... Wednesday, May 3 Equity markets slumped today on concerns about upcoming economic data and fears of rising interest rates. The Dow closed down 250 points at 10,480 and the Nasdaq Composite fell 78 points to 3707. The S&P 500 Index slid 31 points to 1415. Trading volume on the NYSE was light at 992 million shares with declining issues ahead of advances by about 2-to-1. Late-day buying increased volume on the Nasdaq to 1.47 billion shares with declines beating advances more than 2-to-1. The 30-year Treasury plunged 1 12/32, bid at 101 22//32, where it yielded 6.11%. Tuesday's new plays (positions/opening prices/strategy): Nabors NBR MAY35P/MAY37P $0.50 credit bull-put Ashland ASH JUN30C/MAY35C $3.88 debit diagonal Tuboscope TBI MAY15C/MAY17C $2.12 debit bull-call The falling equity markets helped each of our new positions in today's session. Nabors was the first candidate and with the issue opening lower, our target was adjusted accordingly. A number of contracts traded at $0.50 credit and a higher price was available later in the day. Ashland remained in a small range for most of the session but there were numerous entry opportunities. Tuboscope was the most uncooperative issue of the group, providing a barely acceptable opening debit (on a simultaneous order basis). Portfolio plays: Stocks fell precipitously during today's session as concerns over wage pressures and rising import prices rattled equity markets. Selling pressure accelerated in afternoon trading after the beige book showed that wage pressures are increasing and shortages of labor exist across America. Additional employment data is due out later this week along with quarterly productivity data and traders are also worried about Fed Chair Alan Greenspan's speech on Thursday. On a promising note, blue-chip stocks ended the day well above their lowest levels with the Dow rebounding from an early 300 point deficit. Sadly, only five industrial components closed the session positive. On the Nasdaq, stocks declined in all the major sectors. Recent leaders in the Biotechnology and Internet groups also slumped, extending Tuesday's losses. In the broad market, food, housewares and textile stocks advanced while Healthcare, retail and footwear issues consolidated. The majority of stocks in the Spreads/Combos portfolio moved lower during today's trading. Of course, our bearish positions benefited from the downward movement with plays in both Omnicom (OMC) and Temple Inland (TIN) improving during the session. Our straddle position in Applix (APLX) reached $9.00 credit, a $2.50 profit on $6.50 invested. In the bullish category, Kelloggs (K) managed a $0.62 gain as stocks in the food group moved higher on merger speculation and Network Associates (NETA) is beginning to rebound from a recent sell-off along with other companies in the Internet Security Sector. We have two positions, both with short options at $25 in May, and the stock is trading near the area of maximum profit. We will attempt to roll forward to June options during the next rally. Thursday, May 4 Investors moved to the sidelines today as fears of upcoming economic data plagued the market. The Dow Industrial Average ended down 67 points while the Nasdaq composite index rallied in the final hour to close up 12 points at 3,720. The broad market was nearly unchanged, with the S&P 500 Index closing at 1,409. The Nasdaq reported its lightest session of the year with 1.28 billion shares changing hands. On the NYSE, only 915 million shares traded. The 30-year U.S. Treasury bond fell 19/32, with the yield rising to 6.16%. Portfolio plays: The Spreads portfolio enjoyed a number of big winners today and Sepracor (SEPR) was once again the top performer. The bullish issue rallied $8 to a recent high near $100 and as we commented earlier in the week, our LEAPS/CC's play required an adjustment to maintain maximum profitability. The new diagonal position is JAN60C/JUN95C at a cost basis of $30.00 and the new spread has no upside risk. Teradyne (TER) climbed $4.75 to $105 and Cypress (CY) rose $2 to $51.50, both on strength on the semiconductor sector. The Oil Services group recovered from Wednesday's slump with the majority of issues participating in the bullish move. Halliburton (HAL) led that category with a $1.62 gain to end at $47 and Nabors (NBR), Unocal (UCL) and Tuboscope (TBI) joined in the rally. Our small-cap leaders included Network Associates (NETA), which closed above $25 after a second consecutive day of gains, and Andrew Corporation (ANDW) which rose $1 to end at $28. Magna International (MGA) also rebounded during the session, climbing to the top of a recent channel near $48. Our bullish calendar spread will begin to profit as the issue nears $50. The finance sector is starting to feel the effects of the upcoming rate increase and two of our banking issues are beginning to fade after recent rallies. Bank One (ONE) and Summit Bancorp (SUB) have both slumped in the past week and without any adjustments, there is a potential for significant losses. At this point, it may be prudent to roll both positions out to June, protecting the downside against further consolidation in each issue. The credit for the neutral transition in the Summit play; JUL20C/JUN25C is $0.62, leaving a cost basis of $3.50. The LEAPS/CC's position in Bank One might benefit from a downward adjustment to the $25 calls. In this case, our plan is to simply avoid losses in the short-term and assume a bullish, in-the-money posture that allows for future profits. The cost basis in the new position; JAN20C/JUN25C will be $5.00. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - SPECULATION PLAYS - ****************************************************************** CS - Cabletron $25.44 *** On The Rebound? *** Cabletron develops, manufactures, markets, installs and supports local and wide area network connectivity hardware and software products, including switches and hubs, remote access devices and management software. Cabletron delivers products to address the full range of networking technologies, including Ethernet, Fast Ethernet, Gigabit Ethernet, Token Ring, fiber distributed data interface, asynchronous transfer mode, integrated services digital network and frame relay. Their core products include the SmartSwitch hardware product family and Spectrum network management software. Cabletron also produces and supports other network products, adapters, interconnection equipment, wiring cables and file server products, and provides a wide range of networking services. The Company distributes its products to manufacturing companies, governments, financial institutions, universities and law firms around the world. Cabletron owns and plans to spin off with public offerings a number of independent units. Unfortunately, in late March the company was punished severely after they indicated the breakup would take longer than Wall Street expected. The CEO reported that this situation could temporarily dampen financial results and hamper the company's ability to focus on its customers and competition. Analysts had been under the impression that CS would spin off the four independent units by the end of last year but current plans suggest this will not occur until late 2000. The independent companies include GlobalNetwork, a business unit formed to help companies and service providers design and build networks which are used to send Internet and corporate data from point to point; Aprisma Management Technologies, which markets network management software; Riverstone Networks, which sells high-speed equipment to service providers; and Enterasys Networks, which makes networking equipment for businesses. Cabletron is optimistic about the eventual success of each of these independent companies and analysts have valued the entire group at $50-$60. Cabletron recently announced plans to buy back $400 million worth of its stock, a sign they are confident about the bullish outlook. Our strategy is simply a low-risk, LEAPS with Covered-Calls position that offers excellent upside potential. PLAY (conservative - bullish/diagonal spread): BUY CALL JAN01-15 ZCJ-AC OI=1479 A=$12.62 SELL CALL JUN00-25 CS-FE OI=145 B=$3.38 INITIAL NET DEBIT TARGET=$9.00 TARGET ROI=100% Chart = /charts/charts.asp?symbol=CS ***** DF - Dean Foods $27.50 *** Cheap Speculation! *** Dean Foods is engaged in the processing, distribution and sales of dairy, pickle and specialty products. The company's primary products are Dairy (fluid milk and cultured products, ice cream and extended shelf life products), Pickles (pickles, relishes and specialty items) and Specialty products (refrigerated salad dressings, dips, sauces and puddings). A significant portion of the company's products is sold under private labels. Dean Foods also operates a trucking business hauling less-than-truckload freight, concentrating primarily on refrigerated cartage, the results of which are reported in the Specialty segment. The Food and Beverage group has been active this past week on speculation of a merger in the sector. Unilever Plc has made an $18 billion bid ($66 per share) for Bestfoods (BFO) but analysts said it would have to sweeten its offer by $3 per share to get Bestfoods to the table. Regardless of the outcome, the bid is expected to trigger a long-awaited round of consolidation in the major food sector where stocks have languished due to slow growth prospects. Dean Foods appears to be in the group of potential targets as the stock has begun to rally from a recent basing pattern. With the renewed interest in the industry, this is a reasonably conservative "speculation play" with plenty of time to achieve a favorable profit. PLAY (conservative - bullish/calendar spread): BUY CALL AUG-30 DF-HF OI=47 A=$2.12 SELL CALL MAY-30 DF-EF OI=121 B=$0.31 INITIAL NET DEBIT TARGET=$1.62 TARGET ROI=50% The basic premise in a calendar spread is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. A less neutral and more bullish type of calendar spread is when the underlying issue is some distance below the strike price of the options. This position is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, we would prefer to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, you will have to buy them back to preserve the long-term position. Chart = /charts/charts.asp?symbol=DF ***** ABGX - Abgenix $102.88 ** On The Move! *** Abgenix is a biopharmaceutical company that develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions, including transplant-related diseases, inflammatory and autoimmune disorders, cardiovascular disease, infectious diseases and cancer. Abgenix has recently developed XenoMouse technology, a proprietary technology which produces antibodies with fully human protein sequences, generates a diverse antibody response to essentially any disease target appropriate for antibody therapy and high affinity antibodies that do not require further engineering. Abgenix also has four antibody product candidates that are under development. The majority of Major Drug companies have performed well in the past few weeks and the Biotechnology Sector is also back on track after a recent consolidation. Today the group mounted a comeback and ABGX moved to the top of a short-term trading range with a $6 rally to $102.88. We like the issue for a bullish position but there are not too many favorable ways to approach the inflated option premiums. In this case, we decided to sell premium for credit and use the earned income to offset any losses on the downside, in the event we accept assignment of the issue. If the share value moves through the small resistance area near $130, we will simply buy the stock to cover our sold options. PLAY (aggressive - neutral/credit strangle): SELL CALL MAY-145 AXY-EI OI=400 B=$1.18 SELL PUT MAY-80 AZG-QP OI=4 B=$1.12 INITIAL NET CREDIT TARGET=$2.25-2.38 ROI(max)=10% UPSIDE B/E=$147.38 DOWNSIDE B/E=$77.62 Chart = /charts/charts.asp?symbol=ABGX ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ See Disclaimer in section one ************
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "email@example.com"
Option Investor Inc